KSH

KSH's share price surge recently is worth noting. After staying stagnant for a full year around 54ct, news about China's third SEZ-like township near Beijing which led to feverish rise in property prices in its vicinity has given the stock the fillip it needed to break out of that price stagnation.

Below is a quick analysis of KSH's Gaobeidian (GBD) story:

As GBD was set out to be a 10-year project, it’s hard to accurately predict its earnings on a year-to-year basis. But if we just look at the overall figures, and make some reasonable assumptions, we see that if the project is fully completed without too many glitches, it will give much visibility to KSH over the next 10 years. This visibility is rather positive, especially among Sg developers which can’t clinch land in Singapore for development.

Based on a moderately optimistic view that 48,000 units of residential units in GBD will be built and sold in total, each unit of size 110 sq m (which was the original size of the first phase launch), an ASP (average selling price) of RMB14,000 psm (price is spread over 10 years, from as low as RMB10-12,000 psm in initial years to closer to RMB18,000 psm in later years), an ACP (average cost price, which includes land, construction, marketing, etc but exclude land value tax) of RMB5,000 psm (initially as low as RMB3,000), a 35% land value tax (this is an estimated rate which applies to land value that has surged over 100%), a 25% corporate tax rate, below is a simplistic estimate of the whole site’s earnings potential (based solely on residential units):

KSH’s share of 22.5% is S$1.042 billion, spread over 10 years. That works out to $2.34 per share, which on average means more than 20ct per year. (Note that this is not far off from UOBKH’s analyst report of S$368m for Stage 1 alone (1.9m sq m out of 5.3m sq m total land size), which implies S$1.0265b for Stage 1 + 2, based on extrapolation).

I have not taken into consideration the time value of money as well as assuming a fully sold scenario, but these can probably be offset by the fact that I have also not taken into consideration the commercial space that will be built and sold. If I am correct, Stage 1 will see 800,000 sq m of amenities and commercial space, some of which will be handed over to the government but the rest would be for sale/investment.

Note also that I am assuming the land is fully paid for (KSH's share is only S$23m) and there is no further compensation to farmers to relocate, and that construction costs for facilities and infrastructure to be handed over free to the government as part of the deal would be covered by profits from the commercial space. Also, very little if any capex is required for the residential units as buyers pay 30% down payment, which is enough to cover construction cost.

Apart from this GBD venture, KSH has yet to recognize about S$200m worth of its share of sold properties, has shares in Aussie and UK ventures, a construction arm and some investment properties. These projects will help it sustain a 3.5-4ct dividend these 2 years before GBD's earnings kick in.

While the above are the rosy quantitative figures, it’s actually the qualitative aspects of KSH that seal the deal for me. By this I mean the mgt and major shareholders’ acumen, humility and generosity. These are proven by the many years of consistent high dividend payouts and the humility and listening ears shown at AGMs.

Note also that KSH is majorly owned by 4 friends, with 19.43%, 14.5%, 14.5% and 12.18% stakes (total 60.6%) respectively. Compared to companies owned tightly by one family, it may be more rewarding for these friends to share the profits of the company through dividend payouts and bonus issues, and by doing so, benefit minority shareholders.

Few prop stocks trade above NAV, and KSH is one of them. KSH's prospects at GBD and its generosity and acumen are definitely reasons for this phenomena.

KSH proposed a 1 for 4 bonus issue and Final DPS of 2ct on Friday after market close. The bonus issue was a surprise and is yet another demonstration of the major shareholders’ understanding of how investors perceive a company’s stock. It’s not the bonus issue per se that investors like myself will be happy about but the comfort we get knowing that the major owners are doing the right thing, time and again. This warrants a premium valuation for KSH against other developers whose interests are not aligned with those of their minority shareholders, and whose promises to “look into” shareholders’ pleas during AGMs are broken the moment the AGMs end. Indeed, KSH’s recent price movement is testament to this phenomenon.

Meanwhile KSH is in a consortium that is paying $575m (plus a differential premium of about $208m) for Rio Casa, taking a joint-leading stake of 35%. Land size is 396,230 sq ft while GFA is 1,109,443 sq ft. Adding a 10% balcony space gives the site a possible NSA of 1.22m sq ft and a price (based on NSA) of $642psf ppr. I expect breakeven at about $1,000 psf, and an ASP of about $1,100 psf, giving the site a slim margin of $100psf and a gross profit of about $122m. KSH’s stake will yield about $42m.

With Rio Casa being an en bloc site, completion of purchase could take longer and sale could be launched perhaps in 2019 or later, by which time the property market could be more bullish (or bearish?). My estimates above are therefore subject to changes.

Intense competition for Govt Land Sale sites means that smaller developers have to turn to en bloc sites for land, and indeed KSH has done so. Meanwhile, the consortium could also award the building works to KSH and give the company’s construction arm a boost.